While student loan debt cannot be discharged in bankruptcy, there are other options available to debtors that are struggling to make monthly student loan payments.
Deferment and Forbearance
Under certain circumstances, a debtor is able to receive a deferment or forbearance that will allow him or her to temporarily postpone or reduce your student loan payments. Often times, this is the best option to avoid defaulting on a loan.
A deferment is a period during which the repayment on the principal and interest of the loan is temporarily delayed. This means that for the set period of time, you will not need to make payments on your student loans. Typically, deferments are only granted to those returning to school. And oftentimes, the federal government will help to pay the interest that accrues on the loan during the period or deferment.
With forbearance, a debtor may be able to stop making payments or reduce the monthly payments for up to 12 months. Interest continues to accrue on both subsidized and unsubsidized loans. The debtor will be responsible for paying this interest back once the loan is out of forbearance.
Your loan creditor will have specific rules regarding how to apply for deferment or forbearance so you will need to contact them to figure out what information and paperwork will be required in order to secure your deferment or forbearance.
Forbearance In Order to Handle Other Debt
It makes sense that a lot of people dealing with student loan debt often decide to focus on their other forms of debt, as a way of off-setting giant student loan bills.
Americans and Debt
It’s estimated that roughly 77 million Americans have debt. That means 35% of adult Americans have issues dealing with debt. On average, a household owes $16,000 in credit card debt. And consider this – when you are stuck trying to pay down something, that means all your money is going towards that payment, which can mean incurring debt on the other end. For example, take a recently graduated student that has to pay $450 a month towards her student loans. When her paycheck is going towards that, how is she going to pay for other things? Exactly, she’s going to have to put it on a credit card. Cut to buying a car, paying rent, paying for food, and you’ll see how payments for just standard living costs can snowball.
If you are able to take a forbearance on your student loan in order to halt payments on it for a year to two years, that might give you the option to work on paying off other debt. If this is your strategy, you’ll want to be strategic when it comes to paying down your remaining debt.
Dealing with Debt Tips
Stop spending. This is probably obvious, but you need to get your spending habits under control. Any other piece of advice will not help you if you are wracking up debt as quickly as you are trying to pay it off. It’s time to start a budget when it comes to food and other expenses. You’ll need to be strict until you have your credit card spending under control.
Look for lower rates. Take a look at all of your credit card interest rates. Once you have a list, start calling around and asking the credit card lenders for a lower rate. They won’t always say yes, but it can save you lots of money if they agree to it. You might also mention that you’re experiencing trouble paying it off. Credit card companies are often very willing to help you in order to ensure that you stay a customer with them.
Consider consolidating your credit card debt. A debt consolidation loan from a bank, or a peer-to-peer lender can help you combine all your debts into one place. Taking advantage of a 0% balance transfer offer is also great because many of these offers come with low interest or even no interest for up to a year. This means that all your monthly payments are applied to the principle and not the interest. Once you have all your debts in one place, you can pay them all down with one monthly payment.
Pay off more than just minimums. After you lower your interest rate or consolidate your debt, try to pay down the balance in an aggressive way. Even a small increase from just paying the monthly minimum can save you tons of money on interest. This is especially true if you have consolidated with an interest-free credit card. In these instances, it’s crucial that you pay down the balance before that interest-free time period expires.
Create a repayment plan. Many lenders will work out a repayment plan with you to repay debt. You can also work with a credit counseling service to create a repayment plan. This helps keep you on track, while also providing a light at the end of the tunnel to where you can see yourself being debt-free.
For debtors who cannot seem to get a hold on debt, even if they have taken a forbearance on their student loans, it might be time to consider bankruptcy.
Is Bankruptcy Bad?
You’ve always been told that bankruptcy is a bad thing, and that it can take years to recover. But a lot of times, bankruptcy can be just what you need for financial recovery.
While it’s true that filing for Chapter 13 or Chapter 7 bankruptcy has its downfalls – it will lower your credit score by 100 points or more and thus directly impact your ability to qualify for new credit cards, a mortgage loan, auto loan, or personal loan for a few years after you file – but that doesn’t mean that you should avoid it at all costs.
“We look at bankruptcy as a last resort,” said Leslie Tayne, a debt-relief attorney. “But sometimes I do advise people to file for bankruptcy. When paying off debt would leave you with no money left over to put food on the table, if it means you can’t pay your mortgage, if there is nothing left over, that’s catastrophic, and then it makes sense to file for bankruptcy.”
When Bankruptcy Can Help
Here are some instances when bankruptcy can be helpful:
Liabilities Are More Than Assets
Tayne advises on filing bankruptcy when consumers owe so much that their liabilities are far higher than the value of their assets. Why? Because in these cases, it can be impossible for a consumer to actually catch up to their debt.
“If income is far less than expenses, if there is no end in sight even if I help them cut their expenses, then bankruptcy might be the only option,” says Tayne. “If their income will never let them meet the requirements to pay even the minimal amount of what they owe each month? Then bankruptcy might be their only choice.”
Negotiations Don’t Work
It’s always advised that before you decided to file for bankruptcy, that you try to work things our with your creditors. Creditors are often inclined to help out consumers as long as consumers are active in doing so. Many creditors are able to reduce the amount of money owed if you are able to prove you are struggling financially. You might need to provide copies of your most recent paycheck stubs and bank statements, or anything that will prove that your income has fallen or that your savings are depleted to your creditors before they are able to offer assistance.
This is the first step you should take in trying to deal with debt.
But if your creditors are not willing to negotiate, the only option you may have is to file for bankruptcy protection. After you file, your bankruptcy trustee will be responsible for negotiating with the people you owe. A lot of times, these professional negotiators are more able to convince creditors to forgive at least some of your debt.
A Job Loss or Serious Illness
Job loss or serious illness can be devastating – and not just emotionally, but also financially.
Bills and debt tend to pile up quickly during these times, which can make it impossible to generate the monthly income you were once used to.
If job loss, medical emergency, or other financial disaster has made it impossible for you to come up with a monthly income, and there is no way that you will be able to recover in a quick amount of time, then bankruptcy can provide the relief you might need to help you recover from these financial setbacks.
Working with a Bankruptcy Attorney
When you are dealing with insurmountable debt, it’s highly advised that you work with a bankruptcy attorney that can walk you through the process and clarify any questions or concerns you might have regarding your debt situation. A bankruptcy attorney might also be able to prescribe options that keep you out of having to declare bankruptcy in the first place. There can be a lot of questions during this extremely stressful time. Let the lawyers at Resnik Hayes Moradi LLP walk you through the process so you can achieve the best outcome possible.